Thursday, February 21, 2013

Italy's recession and upcoming elections threaten reforms

The Guardian had a good summary yesterday on the situation in Italy, where the recession is showing no signs of abating. The winner of the upcoming elections will face some severe challenges.
The Guardian: - A stagnating economy, corruption, organised crime, political apathy, misogyny, youth unemployment ... The person elected to run Italy next weekend will have a formidable to-do list.

The country is now in its longest recession in 20 years, the economy having contracted for the last six consecutive quarters and languished in more than a decade of almost non-existent growth. Unemployment is at more than 11%; for under-25s, it is more than 36%. Italy has the second highest ratio of sovereign debt to GDP in the EU.

It could have been worse. In autumn 2011, when Mario Monti took over after years of successive governments largely ignoring the problem, there were fears that the EU's fourth largest economy might fall into the abyss and drag the rest of the eurozone with it. The technocrat government avoided that disaster scenario and has done much to restore the markets' faith in Italy. Late last year, before the spectre of a Silvio Berlusconi comeback unsettled matters, 10-year bond yields were at a two-year low. It has implemented reforms – including of the pension system and labour market – that are viewed as a crucial part of long-term recovery and could, according to the IMF, lead to a 6% increase in GDP if properly implemented.

But economists say much more needs to be done to effect the kind of deep and lasting change needed to get Italy growing again. They focus on Italy's lack of competitiveness; its untapped labour market resources – women and young people; a thorough reform of product markets and of crucial institutions such as the justice and education systems. Only once these have been properly tackled, they say, will Italy be in a position to capitalise on its strengths, which include a strong manufacturing base, successful exporters, relatively low budget deficit and relatively high domestic savings. The big fear, however, is that the election will not usher in a strong, responsible government, but yet more political instability, which Italy can ill afford.
It is particularly troubling to see the industrial sector of the economy still contracting, even as Germany's industries stabilize.

Source: Deutsche Bank

As discussed earlier (see post), Berlusconi is now using the nation's economic mess to his advantage, increasing the risk to recent reforms implemented by Monti.
Reuters: - Confidence in Italy has been shaken in the run-up to the voting, after a strong campaign by former prime minister Silvio Berlusconi that has opened up the three-way race with outgoing premier Mario Monti and centre-left leader Pier Luigi Bersani.

"Investors are becoming more and more cautious ahead of the weekend ... and altogether people decided here to pull the trigger and go risk-off," said Christian Lenk, a fixed income strategist at DZ Bank.
According to S&P, Italy could repeat its history of forming "weak and fragmented coalition governments", dampening or even reversing the much needed reforms.
S&P: - We believe that a risk exists that after the Feb 24-25 elections there may be a loss of momentum on important reforms to improve Italian growth prospects ...

The implementation of measures to boost Italy's medium-term growth prospects depends, in our view, on the strength of the next government's mandate in both houses of parliament.
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